Don't trust politicians' promises to ensure a comfortable retirement

State provision might be improved but experts advise people to secure their own future, writes Faith Archer

Proposals in the Queen's Speech on Wednesday may improve state pensions one day but experts said anyone seeking a comfortable retirement who can afford to save for themselves should do so, rather than relying on politicians' promises.

Currently, a single person on the full basic state pension receives only £84.25 a week, which is less than a fifth of the national average earnings of £23,580 a year. Even including the full element of Pension Credit, taking income to £109.45 a week, the pensioner will still be living on less than a quarter of average earnings.

Restoring the link to earnings may drag state pension payments upwards, but that is only forecast to take effect from 2012.

Tom McPhail, head of pensions research at independent financial advisers (IFAs) Hargreaves Lansdown, said: "There is a relentless Government agenda, thrusting the responsibility for pension savings on to individuals. Everyone needs to consider how to fund their own retirement, and not rely on the state."

As our table on "The cost of delay" shows, the longer you put off private pension saving, the less chance you have to build up a financial cushion for retirement. If you start saving a gross contribution of £200 a month from the age of 25, you can expect to build up a pension pot big enough to buy an income of £29,400 a year when retiring at 65.

Wait until 45, and you will only raise enough to fund £6,880 a year.

Michelle Cracknell, director at IFAs Origen, said: "Time in the market is more important than timing the market. Do not delay putting your money in a pension, because you will do more damage by leaving it to the last minute."

The Government is so keen to encourage pension saving, that it will actually pay you to do so. For every £1 a basic-rate taxpayer puts in a pension, the Government will add an extra 28p in tax relief, on the basis that 28p represents 22 per cent of the gross £1.28 contribution.

A higher-rate taxpayer gets the same uplift, but can then claim back another 18 per cent of the gross £1.28 contribution through their tax coding, adding an extra 23p per pound.

Ms Cracknell said: "In simple terms, if a higher-rate taxpayer wants to put £1,000 into a pension fund, it only costs £600, partly from the uplift and partly from the saving in their pocket."

"For tax-efficient saving, there is nothing better than a pension fund for getting an uplift immediately. Individual savings accounts (Isas) provide tax relief on your investment, and you do not have to suffer capital gains tax, but the money you invest does not get a tax rebate.

"However, you do have to accept the restrictions on pension saving, in that you can only access the money at age 55, and can only take a quarter as a lump sum with the rest as income."

When saving for retirement, do not throw your money into a pensions black hole and assume it will look after itself. Look beneath the "pension" label, and consider where your money is invested. With personal pensions, the income generated will depend on how well your investments have performed, rather than paying out a defined benefit linked to your salary that some occupational schemes still deliver.

Ms Cracknell said: "There are three crucial parts of pension saving: how much you put in, where you invest the money, and how you draw it out to meet your needs and objectives.

"Far too many people make the original investment and forget about it. But funds can go in and out of fashion, and fundamentally change.

"If you want to get the most out of your money, you need to look at where it has been invested on a regular basis."

Fortunately, changes to pension regulation introduced on April 6 this year, known as "A-Day", allow you more freedom on how to build up your pension and then draw down the benefits.

You can now stash away much more in your pension, up to 100 per cent of earnings each year, to a maximum of £215,000 for the 2006/07 tax year. Ms Cracknell said: "This means that if you have a windfall through inherited money, or the proceeds from an employer's share scheme, it is now much easier to put a lump sum into your pension scheme."

Post A-Day, you can also take out 25 per cent of your pension fund as a tax-free lump sum at age 50, rising to age 55 after 2010, without having to start taking any retirement income.

Ms Cracknell said: "Now that many working couples are having children in their mid-30s, by putting money in their pension scheme they could get the benefit of the uplift from tax relief, and then access a lump sum as their children go through university."

The A-Day changes also make it much easier to control your pensions in one place.

Nowadays, as people move between jobs, they tend to accumulate different pension plans, rather than retiring after 40 years with the same company and pension scheme.

More than one in five adults over the age of 50 have at least three private pensions, according to the Association of British Insurers.

Mr McPhail recommended bringing different pensions together into a single account, to help improve performance and cut costs – although if you are a member of valuable final salary schemes, also known as defined-benefit pensions, you should leave this money where it is.

Mr McPhail said: "With the new post A-Day rules, it is now easier to consolidate your pensions than it is to transfer a mortgage.

"With multiple pension contracts, it is much harder to build a coherent investment strategy, track the performance of your fund managers and check your overall pension provision is adequate. Consolidating your pensions also brings economies of scale. Even with simple pensions like stakeholder accounts, some schemes give discounts for large fund values, so it makes sense to have all your money in one place."

You can use accounts from self-invested personal pensions (Sipps) to stakeholder pensions to access a wide variety of different funds and managers. With the benefit of financial advice, you can then put together a combination of investments to suit the level of risk you are prepared to take.

Ms Cracknell said: "You can choose between simple Sipps, with a wide range of different funds and managers, to more expensive tailor-made Sipps, which allow you to go into direct commercial property investment and unlisted shares, for example in family companies or hedge funds.

"These will be more expensive, so I would only choose them if you do want to go into more specialist areas of investment. Otherwise, there are a lot of very good Sipps with low costs, such as those offered by Standard Life and Axa, which have access to most of the big fund management houses."

She said that with fixed costs of £500 a year upwards, plus any investment charges on your chosen funds, Sipps are more sensible for savers with a pension pot of £100,000 or more.

Pension tips

Do not delay. Better to save little and often than put off larger payments

Take advantage of the tax man, who will add tax relief of 28p to every £1 invested by a basic-rate taxpayer, while a higher-rate taxpayer will also get an additional 23p through their tax return

As a rule of thumb, to generate a pension worth about two-thirds of your salary, halve the age at which you start paying into a pension, and pay that proportion of your income for the rest of your working life

Top up with lump sums now that you can put up to 100 per cent of earnings in your pension each year

Review the investments within your pension each year, to check their performance and risk profile match your needs

Remember you can withdraw 25 per cent of your pension pot as a tax-free lump sum from age 50, moving to age 55 after 2010, without having to draw an income

Consider moving multiple pensions plans into a single stakeholder plan or self-invested personal pension (Sipp) to benefit from a choice of funds and managers, help cut costs and track your investments

Note that even if you have an occupational pension with your employer, you can now also save in a personal pension